Charter School Real Estate Profits

In the movie The Founder, future business giant Ray Kroc gets a piece of advice from financial consultant Harry Sonneborn about his fledgling McDonalds chain-- "You're not in the hamburger business; you're in the real estate business." And that does, in fact, turn out to be a secret of Kroc's success.

A new paper from In The Public Interest shows how many charter school operators have learned the same lesson. 

The purchase, development, and financing of facilities for charter schools has become a lucrative industry, buoyed by public financing and the preferential credit lines and interest rates that come from the semi-public status of charter schools.

Today, while public messaging may tout the alleged popularity of charter schools and supposedly long waiting lists for charter seats, many believe that the profitability of the market—not parent demand—is driving charter school growth.

We've seen many times over the years how it's the real estate aspect of the business that attracts some folks to charter school world. Carl Paladino of Bufalo ran a property development company who favored a technique of grabbing charter school properties and then either flipping them back to the operators or making "leaseback" deals. Paladino most notably got himself on the Buffalo School Board where he could promote charter schools further. 

Paladino's interest in charter schools is not in dispute-- not even by him. On the question of making money from working with charters, the Buffalo City News quotes him: "If I didn't, I'd be a friggin' idiot."

The charter school real estate biz is a whole niche, and it turns out there is a such a thing as "charter school niche brokers" who specialize in "helping charter schools find and acquire buildings."

The real estate returns are attractive enough that investors remain a large part of the charter school sector. If you're seeing a proliferation of charter schools in your area even though there seems to be no educational demand for them, you're likely seeing a push by real estate investors who can make a few bucks off of charter real estate deals, whether or not anyone actually gets educated.

Charter operators could watch wheeler-dealers like Paladino or specialty brokers walk off with a bunch of their money, or they could take the next step of just getting into the real estate business themselves. And as ITPI's report shows, that's exactly what many have done. 

Some charter operators grow a hefty real estate wing. Take the 800-pound gorilla of Pennsylvania cyber schools:

Commonwealth Charter Academy (CCA) is the biggest cyber charter in Pennsylvania. Launched in 2003, they have also become big property owners and landlords in Pennsylvania.

Back in 2016, CCA bought the former PA State Employee Credit Union headquarters in Harrisburg for $5 million, to replace several leased offices. They planned to use about 90,000 square feet for a headquarters. That’s about half the space in the building. In 2020, they spent $15.3 million to acquire a 106,000 square foot office building in Malvern (the former headquarters of Ricoh USA), and did so with the help of a company that claims to have “developed deep expertise” in working charter school real estate deals. 

In 2021, they bought out one of their landlords. The Waterfront shopping complex in Homestead had originally housed a Macy’s, which was purchased and turned into office space. CCA was one of the tenants, then bought the 140,000 square feet of office space, using almost half the space themselves, and leasing out the rest. 

Said Commonwealth Charter Academy CEO Thomas Longenecker, “During the last few years, we’ve created a complete business ecosystem at The Waterfront. This strategic purchase was the natural step as we continue to expand our operations.”

But CCA hasn't really tapped the full potential of charter school real estate profiteering. Charter Management Organizations (CMO) often operate in a rules-free zone, allowing lucrative self-dealing. 

National Heritage Academies would be one example of how this works. NHA operates 100 schools in nine states, including Ohio, where NHA leases their buildings from Charter Development Company (CDC)--which is a subsidiary of NHA. Ohio's auditor found that NHA was paying (and collecting from itself) some of the highest lease rates in the state. 

Two things to remember in every example of this sort-- every dollar paid (to themselves) for rent is a dollar not spent on educating children, and every dollar was handed over by taxpayers.

Related party transactions can be absolutely mind-boggling, in a "that can't possibly be legal" kind of boggle. Take this example for the ITPI report:

Alim Ansari owned a 3-acre piece of land in Weslaco, Texas that includes a house and a school building. Ansari is the superintendent of that school—Horizon Montessori Public (charter) school, along with three other charters in the area. The superintendent lived in the house, and leased the building to the school, collecting $168,000 a year in rent in 2020. In 2022, he sold the property for $1.9 million to South Texas Educational Technologies for more than twice its appraised value. South Texas Educational Technologies is a charter management organization that now holds almost $13 million in land/property assets and pays its chief executive officer—Alim Ansari—a comfortable six-figure salary (along with, apparently, free housing).

And while it may make sense that someone who opens a charter school might want to take on the job of building it, smell detectors go off when that turns out to be extraordinarily lucrative. Check this account from Craig Harris at the Arizona Republic:

Glenn Way, charter operator, was in debt, seeking bankruptcy, and resigned the Utah legislature after his wife filed a protective order against him. So Arizona, with a well-funded but barely-regulated charter industry seemed like the place for a fresh start. Way launched the American Leadership Academy, soaked in moral wholesomeness. Way's development and finance companies bought the land and built schools, then leased Way's properties to Way's schools. And it worked out just great. Way's companies handed money back and forth and pocketed about $37 million on real estate deals.

Again-- that's #37 million in taxpayer dollars intended for educating students that was not used for educating students.

There is one other way these shenanigans make off with taxpayer dollars. When charter schools close (as so many of them do), who gets the assets?  An example from ITPI's report

In seeking to discontinue their management contracts in 2010, the governing boards of ten Cleveland charter schools managed by White Hat Management filed suit when White Hat refused to provide in-depth financial records showing how the schools’ public dollars had been spent. White Hat’s agreement with the schools required them to turn over 95 or 96 percent of their public funding to White Hat, and stated that, should the schools close or not renew their contract, all the property associated with the school, including facilities, computers, textbooks, and furniture, belonged to White Hat. The schools lost that suit, with the Court ruling that the contract, as written, was enforceable.

Taxpayers can end up paying for the same building multiple times. First, the taxpayers pay for the school district to build it. Then they pay for the charter operator to buy it from the school district. Then, in cases like the White Hat fiasco, they end up not owning the building at all, as the CMO, or some CMO real estate subsidiary, walks off with the building when the charter fails. In the worst of situations, this means that CMOs actually win whether then charter school succeeds or not. 

The ultimate problem with charters getting into the real estate business is that it exacerbates a fundamental flaw of the "run schools like a business" approach of free market based school choice-- if a school is a business, then its interests conflict with the interests of students. Every dollar spent educating students is a dollar not spent enriching the business and its owners, and vice versa. The argument that the free market will punish the business for not spending enough on students is not really valid; in a free market, the challenge for an education-flavored business is not how to provide the very best education for students, but how to find the bare minimum they can get away with and still make a profit. Maximizing profit means minimizing service provided.

That tension is present in all free marketeering of education. But when the most attractive driver of profit is not even the service, but the building the service is housed in, it just makes matters worse.

Read the ITPI report (it's a brisk 8 pages) including recommendations on how to fix some of this. It's worth a look.